An unexpected stochastic dominance: Pareto distributions, dependence, and diversification

Yuyu Chen, Paul Embrechts and Ruodu Wang

Papers from arXiv.org

Abstract: We find the perhaps surprising inequality that the weighted average of independent and identically distributed Pareto random variables with infinite mean is larger than one such random variable in the sense of first-order stochastic dominance. This result holds for more general models including super-Pareto distributions, negative dependence, and triggering events, and yields superadditivity of the risk measure Value-at-Risk for these models.

Date: 2022-08, Revised 2024-03
New Economics Papers: this item is included in nep-rmg
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